The U.S. Energy Department's weekly inventory release showed a larger-than-expected rise in natural gas supplies on account of mild seasonal weather. Moreover, on a further bearish note, the build was well ahead of the five-year average levels, thereby narrowing the deficit with the benchmark.
About the Weekly Natural Gas Storage Report
The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration (EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.
The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.
Analysis of the Data
Stockpiles held in underground storage in the lower 48 states rose by 111 billion cubic feet (Bcf) for the week ended May 31, 2013, higher than the guided range (of 93–97 Bcf gain) as per the analysts surveyed by Platts, the energy information arm of McGraw-Hill Financial Inc. (MHFI - Analyst Report). The increase – the eighth injection of 2013 – also exceeded both last year’s build of 63 Bcf and the 5-year (2008–2012) average addition of 92 Bcf for the reported week.
Despite past week’s large build, the current storage level – at 2.252 trillion cubic feet (Tcf) – is down 616 Bcf (21.5%) from the last year and is 69 Bcf (3.0%) below the benchmark five-year average.
Natural gas stocks hit an all-time high of 3.929 Tcf last year, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remained robust. In fact, the oversupply of natural gas pushed down prices to a 10-year low of $1.82 per million Btu (MMBtu) during late Apr 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).
However, things have started to look up in recent times. This year, cold winter weather across most parts of the country boosted natural gas demand for space heating by residential/commercial consumers. This, coupled with flat production volumes, meant that the inventory overhang has now gone, thereby driving commodity prices to over $4.40 per MMBtu – the highest in 21 months.
This, in turn, is expected to buoy natural gas producers, particularly smaller players like Quicksilver Resources Inc. , WPX Energy Inc. (WPX - Snapshot Report) and Forest Oil Corp. . With the financial incentive to produce the commodity and the subsequent improvement in the companies’ ability to generate positive earnings surprises, they are likely to move higher from their current Zacks Rank #3 (Hold).
But natural gas demand is currently going through a lean period – with the end of the winter heating season and ahead of the peak cooling loads for summer. Therefore, until hot summer weather prevails across the country and increases electricity draws to run air conditioners, the commodity may experience above-average builds, thereby pulling down prices again.